Regulators take aim at ‘AI washing’

Regulators take aim at ‘AI washing’

Amanda Khatri

Editorial Manager

Regulators are cracking down on exaggerated claims of AI use in products and services. 

Two investment advisers were recently fined by the US Securities and Exchange Commission (SEC) for misleading investors about the use of AI in financial forecasting and advice. 

‘AI washing’, as SEC chair Gary Gensler billed it, is becoming popular with fraudsters who leverage the excitement, hype and buzz around intelligent technologies for nefarious reasons. 

“We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies,” Gensler said. “Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.” 

The two businesses fined, Delphia and Global Predictions, made false claims across social media and in marketing collateral about how their AI solutions could help investors make more money according to the SEC. 

Despite not having any of the AI or machine learning capabilities it claimed, Toronto-based Delphia boasted it “put[s] collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else”. 

The firm breached marketing rules alongside making “false and misleading” statements, the SEC said. 

San Francisco-based Global Predictions, meanwhile, falsely claimed to be the “first regulated AI financial advisor” and lied about having “[e]xpert AI-driven forecasts” through its platform. 

The firm was also sanctioned for breaking marketing rules, having made other false claims about its tax-loss harvesting services, liability hedging, and various other securities law violations. 

Both firms agreed to settle without admitting guilt or denying the charges. 

“As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in ‘AI washing’,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement. 

What is AI washing? 

AI washing lends its name from greenwashing, which regulators began to home in on following a push for greater sustainability in business which led to some companies making false claims made about the positive impact they have on the environment. 

Likewise, AI washing involves deceptive marketing and the exaggeration of the use of AI within products. 

Whilst the practice isn’t illegal as defined under law, regulators are keen to stress they will go after any business that makes unsubstantiated claims. 

The present hype around generative AI has led to a boom in companies promoting ‘AI-powered’ products that can help with productivity, creativity, and in the case of financial services, investing. 

Gensler warned in February that the regulator had identified AI washing and urged companies to be more explicit in declaring the specific operational, competitive, and legal risks surrounding their use of AI. 

Last year, the Federal Trade Commission (FTC) also warned about false or unsubstantiated claims related to AI. 

AI washing and marketing compliance 

The SEC’s actions should send a clear message about mismarketing AI use. 

Businesses have been advised to spell out exactly how they use AI in straightforward terms to ensure consumers and investors understand the risks.  

“There is a conflation now of generative AI and other AI that could muddle the field a little bit. Marketers might be shooting themselves in the foot when they advertise something that ends up not being what people expected”, said Gartner analyst Arun Chandrasekaran. 

Experts say marketing and tech teams must be aligned on messaging and language and ensure product descriptions and marketing messaging don’t claim to be something they aren’t. A collaborative culture within a company can ensure the easy and clear flow of information between departments, firms have been advised.  

Businesses must also ensure they stay attuned to emerging AI-related regulations, which can enhance business reputations and trust. 

Leveraging Automated Regulatory Intelligence tools like CUBE can alert your business to every regulatory change to build an always-current compliance management programme.  

How does CUBE use AI 

CUBE harnesses powerful AI engines and the latest advances in deep learning to transform unstructured regulatory data into user-specific and actionable regulatory intelligence.  

Our computer vision models to collect and structure regulatory data from every single jurisdiction and country to ensure our clients benefit from up-to-date regulatory inventories.  

CUBE’s cognition engine takes this structured and enriched data and learns from user interactions with it and the translated content to train our regulatory language models, ensuring only relevant regulatory issuances are flagged in your compliance management system.  

“As CUBE embarks upon a new era, we have reached the point where we have gone from machine reading of regulations to the early stages of machine understanding and the next phase will be machine enforcing,” said Dr. Yin Lu, Head of Product and AI at CUBE. 

“Compliance is a competitive advantage, not a cost centre. We have to shift this frame of thinking. And the advantage is provided by AI (with human experts in the loop, of course). Because of RegTech, the role of the compliance manager is fundamentally evolving.” 

CUBE comment 

As more and more investors consider using AI tools in marketing investment decisions or deciding to invest in AI technologies, it is paramount for businesses to provide “full, fair and truthful” disclosures, according to regulators. 

Marketing tactics that involve the exaggeration of AI use can ultimately be the downfall of a firm. 

Should businesses fail to learn lessons, enforcement actions may extend to future regulation, as happened with greenwashing. 

To ensure that your business is remaining vigilant in this ever-changing AI regulatory landscape, leverage CUBE’s regulatory intelligence tools. Our Automated Regulatory Intelligence provides businesses with enriched content and the power to keep up with AI compliance.  

Be proactive. Stay one step ahead with CUBE.